The Court of Appeals agreed with the holding that the 2008 Financing Statements did not perfect the Bondholders' security interest in the Pledged Property, but determined that Bondholders met the requirements for perfection on December 17, 2015, and reversed the district court. Vacated the holding that the Bondholders' security interest can be avoided under PROMESA. Vacated and Remanded for further consideration the district court's dismissal of the Bondholders' second and third counterclaims; and, Affirmed the dismissal of the Bondholders' claim regarding the January 2017 Stipulation.

Procedural context:

Within the Puerto Rico Oversight, Management, and Economic Stability Act's case of the Puerto Rico Employee Retirement System (herein after "the System"), through the Fiscal Oversight Board, the System filed suit in the district court on July 21, 2017, seeking declaratory judgments on several issues related to the validity, breadth, and perfection of certain Bondholders' asserted security interest, and regarding the System's compliance with a stipulation between the parties; which required that employers contributions received by the ERS during the pendency of the stay imposed pursuant to PROMESA, § 405 shall be transferred by the ERS to a segregated account for the benefit of the holders of the ERS bonds (the "January 2017 Stipulation"). The Bondholders brought nine counterclaims concerning their asserted security interest as well as an alleged violation of the January 2017 Stipulation. After both sides moved for summary judgment, the district court ruled in favor of the System, finding that the Bondholders' interest was not perfected and could be avoided under 48 USC 2161(a), that there had been no violation of the January 2017 Stipulation and that two of the bondholders' counterclaims should be dismissed. The bondholders appealed.

Facts:

The System is structured to provide pensions and other retirement benefits to employees and officers of the Commonwealth government, of the Legislative Assembly, and of municipalities and public corporations. It is designated as independent and separate from other Commonwealth agencies. Until legislation that went into effect on July 1, 2017, the System was funded by mandatory contributions from employees and employers, and by the System's investment earnings. Seeking to decrease an unfunded liability of approximately $9.9 billion, the System's Board of Trustees adopted a "Pension Funding Bond Resolution" (the "Resolution") on January 24, 2008. The Resolution allowed for the issuance of about $2.9 billion in bonds.
The System executed a security agreement (the "Security Agreement"), which purports to grant the Bondholders a security interest in "Pledged Property" belonging or owed to the System. "Pledged Property" was defined in the Resolution but not in the Security Agreement. The Resolution was not attached to the Security Agreement, and the Security Agreement did not even say what types of property were pledged, whether the Resolution was available to the public, or where the Resolution could be found.
Pursuant to Article 9 of the UCC, as adopted by the Commonwealth, the financing statements needed to be filed to perfect a security interest should contain "a statement indicating the types, or describing the items, of collateral." P.R. Laws Ann. tit. 19,§ 2152(1) (2008).The 2008 Financing Statements filed with the P.R. Department of State described the collateral only by stating that it was "Pledged Property" described in the Security Agreement, which make reference to the collateral described in the Resolution; a document that wasn't attached and could only be found somewhere outside the P.R. Department of State.
On January 17, 2012 the Commonwealth repealed its earlier version of Article 9 of the UCC and enacted Law No. 21, a revised version. The new version of Article 9 made modest changes to the requirements for financing statements, and reduced its effective life from ten to five years. The act went into effect on January 17, 2013.
On December 2015 and January 16, 2016 four Financing Statement Amendments (to the 2008 financing statements) were filed. The amendments contained a full definition of the Pledge Property and named the debtor as the "Employees Retirement System of the Government of the Commonwealth of Puerto Rico." The Fiscal Oversight Board through the System brought the naming of the debtor in the amended financing statements as an issue arguing whether the Financing Statement Amendments sufficed to satisfy the filing requirements for perfection. (The issue on the name appeared when a translation of the 2013 amended Enabling Act was published- for sixty years the translated name was Employees Retirement System, and after the 2013 version the English translation refers to the System as "Retirement System of the Employees of the Government of the Commonwealth of Puerto Rico" and "Employees Retirement System of the Government of the Commonwealth of Puerto Rico." )
The Puerto Rico Oversight, Management, and Economic Stability Act's enactment in June 30, 3016 triggered an automatic temporary stay on creditor's remedies against the Commonwealth and its property. The bondholders moved to lift the stay but their motion was denied. On appeal, the court of appeals vacated the district court's decision and remanded for further proceedings. On remand, the System and the Bondholders entered into the Stipulation described above. When the Fiscal Oversight Board filed the petitions on behalf of Commonwealth on May 1, 2017 and then on behalf of the System on May 21, 2017, couched on the automatic stay, stop transferring the amounts, the Bondholders moved to lift the stay and the parties entered into a stipulation granting until July 21, 2017 for the System to file an adversary proceeding limited to the "validity, priority, extent and enforceability" of the Bondholders' claimed security interest in the Pledge Property and the System's rights regarding employer contributions received during May 2017, the relevant counterclaims by the Bondholders as well as the System's compliance with or violation of the January 2017 Stipulation.
In the complaint the System asserted that the 2008 Financing Statements suffered from an insufficient collateral description and therefore were insufficient to perfect a security interest under the applicable statute at the time. Argued, in addition, that because of the shortened effective time period included in the revised Article 9, the amendments of 2015 and 2016 could not satisfy the requirements for perfection because the original financing statements had lapsed. To support its position the System cited the "savings clause" of the revised Article 9. The System also argued that any UCC filing (whether a financing statement or financing statement amendment) under "Employees Retirement System of the Government of the Commonwealth of Puerto Rico" does not state the correct name. Because a search under the correct name, as per the 2013 amendment to the enabling act -- "Retirement System for Employees of the Government of the Commonwealth of Puerto Rico" -- would not find such a UCC filing, use of the ERS name is seriously misleading, even though both names can be found in different section of the act.
As the parties moved for summary judgment, the district court held that any security interest the Bondholders might possess had not been perfected by the 2008 Financing Statements, because those Statements did not contain an adequate description of the collateral as required under Article 9 in 2008.(citing P.R. Laws Ann. tit. 19, § 2152(1) (2008)). Then determined that the Financing Statement Amendments did not perfect the Bondholders' security interest, because they did not identify the debtor by its correct legal name, which the court determined was the RSE name, as the court felt was required by the version of Article 9 operative in 2015 and 2016. From that standpoint, the district court then held that the Oversight Board, as trustee, could avoid the liens under the strong-arm provision at 11 U.S.C.§ 544(a), which PROMESA incorporates, see 48 U.S.C. § 2161(a). Therefore, it invalidated the Bondholders' interests pursuant to Section 544(a). The district court then held that the System did not violate the January 2017 Stipulation because the adversary proceedings were limited to claims or counterclaims related to employer contributions received during May of 2017, and the System's obligation to transfer such funds to a segregated account clearly ended with the PROMESA stay on May 1, 2017. The District court dismissed the bondholders counterclaims.
As the appeals follow, the Circuit Court consolidated the cases. The Circuit court agreed with the district court that the 2008 financing statements failed to comply with the requirements to perfect its security status but disagreed with the determination that the 2008 financing statements expired pursuant to the amendments to article 9 of the UCC of Puerto Rico in as much that provision doesn’t have retroactive effect. Therefore, the life of the 2008 financing statements was 10 years, the amendments to the financing statements were filed before the expiration and cured the problem on lack of specificity regarding the description of the pledge property. The Court of Appeals also disserted on the arguments about the proper name of the Employee Retirement System and pointed out that “In its complaint in this case, the System referred to itself as "the Employees Retirement System of the Government of the Commonwealth of Puerto Rico" or "ERS." The System referred to itself in the same way in its Answer to Defendant's Counterclaims. The System did not mention "Retirement System for Employees" or "RSE" in either document, ” as it claims is the correct name after the 2013 amendment to its enabling act. The Court of Appeals concluded that there is no doubt that the ERS name was the official and only name of the System for over sixty years. So, any putative creditors would have had to search under that name to find prior liens even if the System's name did change in 2014 and; the "Employees Retirement System of the Government of the Commonwealth of Puerto Rico" remained a valid name for UCC purposes when the Financing Statement Amendments were filed.
Regarding the avoidance power under the Puerto Rico Oversight, Management, and Economic Stability Act the Court of Appeals hold that there is no doubt that because the parties filed correctly and perfected their security interest, "their rights as lienholders are superior to those of the trustee as a hypothetical lienholder under 11U.S.C. § 544").
As to the Bondholders counterclaims two and three, Counterclaim Two sought a declaration stating that the "Bondholders hold valid, enforceable, attached, perfected, first priority liens on and security interest in the Pledged Property whether ERS became entitled to collect such property before or after the commencement of ERS's Title III case." Counterclaim Three sought a declaration stating that "because the employer contributions constitute 'special revenues,' [Bondholders'] security interests in and liens on employer contributions received by the [System] after the Petition Date remain enforceable pursuant to 11 U.S.C. § 928(a)." as the court of appeals found the 2008 Financing Statements effective as amended, it remanded to the district court for further consideration of the dismissals of these counterclaims in light of this opinion.
On the violation of the January 2017’s issue, the Court of Appeals noted, in agreement with the determination of the district court, that the Bondholders conceded in their Answer and Counterclaims that "ERS was obligated to place Employers' Contributions into the Segregated Account only for the duration of the PROMESA Section 405 Stay," and the Section 405 stay expired as of May 1, 2017. Therefore, the district court correctly dismissed the Bondholders’ claim.